Should there be a policy on private equity investment?

MUMBAI: Sometime last year, the monetary policy authority wrote to the Government and the capital markets regulator indicating its uneasiness with private equity flows.

In the overall hierarchy of flows, the Central bank places private equity well below other forms of capital such as remittances and foreign direct investment. In fact, it has said that the classification of private equity flows would have to be looked at closely considering that in some cases, investors had exited quickly without staying on even for the medium term.

These concerns and estimates of private equity investments topping $10 billion in 2007 had prompted the Government to write to SEBI. The finance ministry wanted the regulator to collect data relating to investments by private equity funds and based on that, to ascertain whether there were any regulatory concerns. The aim was to revisit the issue after an analysis.

But private equity fund managers here who were fretting at the thought of being policed, need not worry at least in the near term. For, the capital markets regulator has made it clear that it is not equipped to collect the data on private equity. Rather, the Central bank, which monitors all inflows and outflows, is far better positioned to carry out this task, it has said. Since private equity could come in several forms, such as through foreign venture capital funds, it has been suggested that the RBI could be mandated to track these flows.

Policy managers in Delhi say that the issue is no longer live. For good reasons. One, there is the feeling that the frenetic pace at which private equity investment was pouring in as reflected in the figures over the last three years, may not be sustained. And with a reversal of capital flows over the last few weeks, which is in line with the RBI���s assessment made in end January, neither the government nor the regulators would want to rock the boat.

SEBI, for instance, has often pointed out to the fact that private equity is unregulated elsewhere. Others have defended private equity saying that smaller local firms, which have growth potential but lack access to funds, benefit without ceding excess control.

The International Organisation of Securities Commissions (IOSCO), the global organisation of securities commissions, had released a consultation report on private equity. It has raised issues relating to increasing leverage levels and more complex capital structures, the potential for market abuse, the conflicts of interest which exist between the differing roles and responsibilities that private equity firms and market intermediaries take on in the course of private equity business, transparency and overall market efficiency.

A debate is on. The UK���s Financial Services Authority (FSA) has identified the key risks relating to private equity, which it says include excessive leverage (not a serious concern in India considering the severe regulatory restrictions on such leveraging in this country) and reduction in overall capital market efficiency. What it means in this case is the significant expansion of the private equity market which poses a danger to the quality, size and depth of the public markets.

The FSA���s concerns may be due to the fact that a large number of firms with growth potential are taking the private equity route leading to a decline in the number of firms going public. But that does not appear to be the case in India where firms in which private equity funds have invested money did get listed.

For the moment though, a policy on private equity investment is not on the radar of the Government or the regulators.